JERUSALEM, April 20 (Reuters) - The most senior Islamic cleric in Jerusalem said on Sunday Israeli police hurled stun grenades into al-Aqsa mosque, Islam's third holiest site, to quell the latest in a string of Palestinian protests at the politically sensitive holy site.

Israeli police denied the allegation, saying officers threw the non-lethal devices, which emit a loud noise, on a plaza outside the mosque after protesters threw rocks and firecrackers at them.

The demonstrators, who have confronted police for the past four days in a bid to stop Israeli and foreign visitors from entering the holy compound, then retreated into al-Aqsa, a police spokesman said.

Tensions at the site run high during Jewish holidays - Jews are now celebrating Passover - when Palestinians are on alert against any attempt by Jews to pray on the compound in defiance of a de facto Israeli government ban on such worship.

Five Palestinians and two police officers were reported injured in Sunday's face-off at the complex revered by Jews as Temple Mount and by Muslims as the Noble Sanctuary. Police said they arrested 16 Palestinians during the latest protests.

Israeli security forces, while operating on the holy compound, shy away from entering al-Aqsa and the Dome of the Rock shrine at the complex situated in the walled Old City of Jerusalem. Israel captured East Jerusalem, along with the West Bank, in the 1967 Middle East war.

Grand Mufti Mohammed Hussein said he was present at Sunday's protests and said police "threw the sound bombs into the (al-Aqsa) mosque itself".

Hussein did not say how many grenades landed inside the mosque. "We condemn this is unacceptable and very dangerous escalation," he added.

GRENADE ASSAULT DENIED

Israeli police spokesman Micky Rosenfeld denied grenades were thrown inside the mosque saying Arab protesters had "retreated into the mosque where they knew we would not enter."

Hussein said Israeli police also fired tear gas and rubber bullets at the protesters, but only outside the mosque, injuring five people. Rosenfeld denied any weapons were discharged other than the stun grenades.

Palestinian concerns have been heightened because allies of Israeli Prime Minister Benjamin Netanyahu are among the most vocal advocates of Jewish prayer at the 25-acre complex, which also houses the Dome of the Rock, where Muslims believe the Prophet Mohammad ascended to heaven.

A visit in 2000 to the holy site by then-Israeli opposition leader Ariel Sharon after peace talks broke down was followed by a five-year-long Palestinian uprising.

Tensions at the holy site coincided with a crisis in Israeli-Palestinian peace talks, at risk of collapse unless negotiators can agree to extend their talks beyond an April 29 deadline set by U.S. Secretary of State John Kerry.

Sovereignty over the compound is at the heart of the Arab-Israeli conflict. Palestinians want to make East Jerusalem the capital of the state they aim to establish in the occupied West Bank and the Gaza Strip.

Israel, citing historical and biblical links, regards all of Jerusalem as its capital, a claim that is not recognised internationally. (Additional reporting by Ali Sawafta in Ramallah, Writing by Ori Lewis; Editing by Jon Boyle)

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